Not what you're
looking for? Try an advanced search.
Buy This Entire Record For
ISSEN v. GSC ENTERPRISES
January 26, 1981
PHILLIP ISSEN, ON BEHALF OF HIMSELF AND ALL OTHERS SIMILARLY SITUATED, AND DERIVATIVELY ON BEHALF OF GSC ENTERPRISES, INC., PLAINTIFFS,
GSC ENTERPRISES, INC., THE BANK OF LINCOLNWOOD, STEINWAY DRUG COMPANY, FORD HOPKINS COMPANY, RICHARD GOODMAN, SAMUEL BERGMAN, EGMONT SAUNDERLING, WALTER GOODMAN, ERWIN HORWITZ, MASON LOUNDY, RAYMOND EIDEN, EDWARD GORENSTEIN, MARSHALL D. LIEB AND HAIG PEDIAN, DEFENDANTS. SEYMOUR ABRAMS, INDIVIDUALLY AND ON BEHALF OF HIMSELF AND ALL OTHER PERSONS SIMILARLY SITUATED, AND DERIVATIVELY ON BEHALF OF GSC ENTERPRISES, INC. AND THE SHAREHOLDERS THEREOF, PLAINTIFFS, V. GSC ENTERPRISES, INC., A CORPORATION, THE BANK OF LINCOLNWOOD, A CORPORATION, MILLER, COOPER & COMPANY, A PARTNERSHIP, RICHARD GOODMAN, WALTER GOODMAN, SAMUEL BERGMAN, EGMONT SAUNDERLING, ERWIN HORWITZ, MASON LOUNDY, RAYMOND EIDEN, EDWARD GORENSTEIN, MARSHALL D. LIEB, HAIG PEDIAN, CLYDE WM. ENGLE, ROGER L. WESTON, SIERRA CAPITAL GROUP, A LIMITED PARTNERSHIP, THE TRUSTEES OF THE JANICE L. ENGLE CHILDREN'S TRUST, MICHAEL D. COUGHLIN, WILLIAM N. WEAVER, JR., AND RONALD K. ZUCKERMAN, DEFENDANTS.
The opinion of the court was delivered by: Aspen, District Judge:
MEMORANDUM OPINION AND ORDER
These cases have a long and complicated history dating back
almost seven years since the filing of the original complaints.
Presently before the Court is the motion of certain defendants*fn1
to dismiss an amendment to plaintiff Abrams' complaint charging
them with various violations of the federal securities laws in
connection with a "going private" merger accomplished by GSC
Enterprises, Inc., in October, 1977, on the ground that the
allegations of the complaint as amended fail to state a claim
upon which relief can be granted. Fed.R.Civ.P. 12(b)(6). The
defendants also oppose Abrams' motions for a preliminary
injunction and for class certification of the additional counts
challenging the 1977 merger as well as the count seeking to
challenge the merger derivatively on behalf of GSC. Since the
resolution of the motion to dismiss will dispose of a large
portion of this case, it will be considered first in this
The original complaints in this consolidated action were filed
in 1974 by Phillip Issen (No. 74 C 0346) and Seymour Abrams (No.
74 C 2215) against GSC Enterprises, Inc. ("GSC"), a Delaware
corporation, Miller, Cooper & Co., certified public accountants
for GSC, and various individual directors and major stockholders
of GSC and its subsidiaries: The Bank of Lincolnwood, Steinway
Drug Co., and Ford Hopkins Drug Co. The plaintiffs sought
declaratory, injunctive, and monetary relief individually and as
representatives of a large class of GSC shareholders or, in the
alternative, derivatively on behalf of GSC, for alleged
violations of sections 10(b) and 14(a) of the Securities Exchange
Act of 1934, 15 U.S.C. § 78j(b), 78n(a), and Rules 10b-5 and
14a-9 promulgated by the Securities and Exchange Commission.*fn2 The
also asserted various pendent state causes of action for breach
of fiduciary duty. Jurisdiction was grounded in section 27 of the
Securities and Exchange Act, 15 U.S.C. § 78aa, 28 U.S.C. § 1331,
and upon principles of pendent jurisdiction over the state law
claims. United Mine Workers v. Gibbs, 383 U.S. 715, 86 S.Ct.
1130, 16 L.Ed.2d 218 (1966). The only motion pending at present
with regard to the original complaints is plaintiffs'
consolidated motion for class certification, which is not
addressed in this opinion.
After the original complaints were filed, the management and
major shareholders of GSC changed. This new group, the "Engle
group," proceeded to acquire approximately 55% of the outstanding
shares of GSC through open market and private purchases and in
October, 1977, caused a merger between GSC and Lincolnwood
Bankcorporation, Inc. ("LBI"), also a Delaware corporation. LBI
was wholly owned by the majority shareholders of GSC, who
transferred their GSC shares to LBI in exchange for all of LBI's
stock, and was incorporated solely for the purpose of enabling
GSC to undertake a "going private" merger pursuant to sections
228 and 251 of the Delaware Corporation Code.*fn3 As a result of the
merger, the Engle group became the sole owners of GSC, the
surviving corporation, and the approximately 6,000 minority
shareholders representing 45% of the outstanding stock of GSC
were "frozen out" of GSC. Shareholders with less than 435 GSC
shares were entitled to receive $1.15 per share in cash for their
shares and the other minority shareholders were entitled to $500
12-year 8 1/2% capital notes of the Lincolnwood Bank, a
wholly-owned subsidiary of GSC. The merger agreement was signed
on October 19, 1977, and it became effective on October 24, 1977.
The minority shareholders were notified within ten days of the
effective date as required by Delaware law.
Following the merger, plaintiff Abrams amended his complaint,
adding Counts IV through X charging the new management and
controlling shareholders of GSC with violations of sections
10(b), 13(d), and 14(a) of the Securities Exchange Act of 1934,
15 U.S.C. § 78j(b), 78m(d), 78n(a), and various breaches of
fiduciary duty under state law in connection with the merger.
Abrams has not yet tendered his GSC shares pursuant to the terms
of the merger and, as far as the record indicates, has not sought
his appraisal remedy in the Delaware courts.*fn4
His motion for a temporary restraining order to delay the
implementation of the merger was denied by Judge Flaum on
November 7, 1977.
The Amendment to the Complaint
In the amendment to his complaint, Abrams charges the
defendants with failing to disclose certain material facts in the
merger notice and other documents sent to the shareholders
immediately following the merger as required by Delaware law.
Briefly summarized, Abrams' allegations of nondisclosure are as
1) The defendants failed to disclose certain
insider agreements pursuant to which defendant Engle,
chairman of the board and president of GSC, allegedly
agreed to purchase (15 months after the merger) the
GSC shares owned by the defendants Lieb, Pedian, and
Eiden for $2.52 per share in cash and the GSC shares
held by Eiden's children for $1.96 per share in cash
while only paying $1.15 per share to GSC's minority
shareholders at the time of the merger. [Amended
Complaint, ¶ 15(a)].
2) The defendants failed to disclose in GSC's
financial statements the fair market value of GSC's
one-half interest (through its wholly-owned
subsidiary, Toulin, Inc.) in the Lincolnwood Bank
building and adjacent land amounting to $1,045,750 or
approximately 25 cents per GSC share. [Amended
Complaint, ¶ 15(b), (c)].
3) The defendants failed to disclose that there was
no market for the 8 1/2% 12-year capital notes of the
Lincolnwood Bank given to the minority shareholders
in exchange for their GSC shares under the terms of
the merger and that if the notes had to be sold at a
discount, they were not the equivalent of cash as the
merger notice stated. [Amended Complaint, ¶
4) The defendants failed to disclose that they had
been discussing "going private" for at least two
years prior to the merger and that the GSC board had
commissioned a study in 1976 on the feasibility of
delisting GSC's stock, which had been listed on the
Amex, and had hired an appraiser in 1977. [Amended
Complaint, ¶ 15(g), (j), (k)].
5) The defendants failed to disclose that GSC could
have paid a dividend prior to the merger, but that
defendants deliberately chose not to do so in order
to depress the market price of GSC stock on the date
of the merger. [Amended Complaint, ¶ 15(h)].
6) The defendants failed to disclose that defendant
Engle was in default of a $500,000 payment due to
Walter Goodman in February, 1977, in connection with
Engle's purchase of Goodman's 800,000 GSC shares.
[Amended Complaint, ¶ 15(l)].
7) The defendants failed to disclose that the stock
pledged by Engle to GSC as collateral for a $700,000
loan (the proceeds of which were used by Engle to
satisfy his indebtedness to Goodman who had been a
major stockholder in GSC before the control of the
company changed hands) had been earlier pledged to a
Chicago bank as security for another $700,000 loan,
so that the GSC loan to Engle was actually unsecured.
[Amended Complaint, ¶ 15(m)].
8) The defendants failed to disclose that Engle had
not paid the interest when due on two previous loans
of $600,000 and $35,000 from GSC. [Amended Complaint,
9) The defendants failed to disclose that the GSC
board of directors felt that GSC's purchase of
126,200 of its own shares for $1.25 per share on the
open market in the months preceding the merger was
favorable to GSC even though GSC's assets were
allegedly worth less at the time of these open market
purchases than at the time of the merger. [Amended
Complaint, ¶ 15(o)].
10) The defendants failed to disclose their
conflict of interest in determining the price to be
paid for the minority shares since the value of their
GSC stock would be reduced by the amount paid to the
minority for their shares. [Amended Complaint, ¶
11) The defendants failed to disclose the existence
of a conspiracy, scheme, and device to defraud the
minority shareholders and enable the Engle group to
gain or perpetuate its control over GSC and force out
minority shareholders by:
a) causing GSC to make open market purchases of
126,200 shares of GSC stock from minority
shareholders in order to increase the stock
percentage owned by the Engle group;
b) causing GSC to borrow $600,000 for the sole
purpose of loaning it to Engle to enable him to
satisfy his indebtedness to Walter Goodman under a
contract by which Engle purchased Goodman's GSC
c) causing GSC to omit the payment of dividends
that could have been paid in order to suppress ...